Toxic Brew

Based on research by Dean Peter Rodriguez, Jonathan P. Doh, Klaus Uhlenbruck, Jamie Collins, Lorraine Eden and Stanislav Shekshnia

• Firms often underestimate corruption’s ill effects on both business and government.
• Corruption can be pervasive, arbitrary – or both.
• Businesses need an arsenal of strategies to fight corruption.

“Why hire a lawyer,” a longstanding Kenyan jokes goes, “when you can buy a judge?”

The same question can be asked in countries from Africa to Asia and from Europe to the Americas, where government corruption so taints life that citizens can feel there’s little to do but turn to grim humor. But government corruption also brews trouble for foreign firms that operate in these countries. Curiously, these firms often underestimate its effects or just ignore them. Scholars typically do too.

Rice Business dean Peter Rodriguez and a team of coauthors decided to take a closer look at this dynamic, assessing what the direct and indirect costs of corruption really are for multinational firms, and proposing strategies they might use to deal with it.

The findings are timely. Foreign direct investment has leaped in recent years, most dramatically in big emerging markets such as China, Brazil, Mexico, Indonesia and Poland. Yet corporate officers, management researchers and even government officials tend to be lock-jawed on the subject. By its very nature, after all, corruption creates a code of “don’t ask; don’t tell.”

The definition the scholars used in their research was simple: the abuse or misuse of governmental power for private or personal gain. Yet the flavor of corruption actually varies from country to country. In some places it is predictable, in some it is arbitrary, and in some a mixture of both.

Predictable corruption pervades the very tissue of well-structured, stable governments, and in a way is easier for foreign firms to manage. At least they can expect the services paid for. Under arbitrary systems, by contrast, such as post-Communist Russia, there’s no way to weigh costs and expectations. Officials may demand bribes, but promised services still will not be delivered. In either case, costs rise further because firms can’t rely on institutions such as courts to enforce contracts.

The direct cost of both types of corruption is clear: money handed out for bribes and kickbacks. But firms that work with corrupt regimes also quietly squander vast resources wrangling red tape and two-stepping with organized crime to buy protection.

Then there are the indirect costs, such as unproductive behavior and lost talent. Firms often hemorrhage huge sums investing in lobbying, influence and currying favor. In some Chinese provinces, for example, foreign companies are openly required to offer “profit-sharing” with local government. In Russia, the Canadian International Development Agency spent $130 million to nurture Canadian businesses there – all for naught after Canadian companies reported their projects repeatedly were “stolen out from under them because of government corruption,” Rodriguez writes. Not only did the Canadians lose: so did the Russian communities that could have benefited from new business and institutions.

What’s a foreign firm to do? One possibility: avoid the mess altogether. That’s what Procter & Gamble did in Nigeria, where it shuttered a Pampers plant rather than bribe customs.

Firms also can alter the way they enter a corrupt country’s market. In Eastern European and former Soviet economies, for instance, the higher the corruption level, the more likely it is a global international firm will invest through a joint venture, with local partners, rather than a wholly owned subsidiary.

Another approach: rigorous internal codes. Honeywell, for example, unequivocally forbids bribes and supplies employees with small cards bearing ethically driven questions they have to ask themselves in ambiguous situations. Employees thought to be high risk for graft get tapped for more training, and all workers can call a toll-free ethics advice line run by a third-party security firm.

In one case, at least, this virtue was its own reward. Honeywell sat out of the bidding on a hefty airport contract in Asia rather than pay a bribe as the price of entry. When a federal investigation revealed that 11 companies had paid it, Honeywell got the contract in the end.

Firms can also reach out to communities where they hope to do business. Hope Group donated textbooks to 17 million students in China with the aim of brightening their reputation. The results of this strategy tend to be mixed, though, since gifts to communities or institutions don’t much impress rapacious officials out for themselves.

International agreements and norms are additional weapons. The Organization of American States, the authors note, has coaxed more than 25 countries to sign the first multilateral treaty to criminalize bribing foreign officials. And, in Kenya, one of the more promising examples of the global approach, it is now slightly harder to buy a judge than it was a decade ago. In 2007, after a wave of political bloodshed, a coalition government launched a huge judicial reform funded by Kenyans, donations from Germany and the United Nations, plus $120 million from the World Bank.

Success has ebbed and flowed, but data-based decision making, better wages for judges and a struggle against corruption culture are among the current gains.

In truth, Rodriguez and his coauthors acknowledge, no one anti-corruption strategy is a panacea. But just as international firms use multiple business strategies, the authors argue, firms should try a mix of antidotes to corruption. Considering the damage it does to foreign firms and host societies both, corruption is too toxic a brew for a healthy business to swallow.

Peter Rodriguez is a Professor of Strategic Management and the Dean of the Jones Graduate School of Business at Rice University.

To learn more, please see: Doh, J. P., Rodriguez, P., Uhlenbruck, K., Collins, J., and Eden, L (2003). Coping with corruption in foreign markets. Academy of Management Executives, 17(3), 114-127.